The Jammu & Kashmir and Ladakh High Court, in a decision by Justice Wasim Sadiq Nargal, has held that the procurement mandates for Micro and Small Enterprises (MSEs) under Sections 3 and 11 of the Public Procurement Policy framed under the Micro, Small and Medium Enterprises Development (MSMED) Act do not apply to composite contracts involving Supply, Installation, and Testing (SIT). The case arose from a challenge brought by three local enterprises—Zain Electricals, Northern Transformers, and North Sun Enterprises—which argued that government tenders for electrical infrastructure projects violated the MSMED Act by failing to reserve procurement for MSEs.
The petitioners relied on Section 11 of the MSMED Act, and on a notification known as S.O. 581(E), which mandates that at least 25% of the procuring entity’s total annual procurement be sourced from MSEs, and reserves specific items exclusively for purchase from MSEs. They argued that these provisions applied to the tendered projects, and challenged their exclusion in connection with SIT contracts. The government, however, countered that the tenders were for composite contracts that inherently combine supply with installation and testing, and therefore cannot be split into separate “goods” and “services” components for the purpose of applying procurement preference.
In its judgment, the Court examined the statutory provisions and the procurement policy, and concluded that the MSMED Act’s preference scheme is designed for pure procurement contracts involving goods or services in isolation, not for integrated work packages such as SIT. The Court observed that in SIT contracts, the supply of goods is inherently interlinked with subsequent installation and testing obligations, making any artificial bifurcation legally impermissible. It noted that attempting to apply procurement preference to just the supply segment, while ignoring the rest, would distort the nature of the contract.
The High Court also relied on established precedent, including Supreme Court decisions, to support its reasoning that composite contracts are indivisible. It referred to cases in which the court declined to artificially separate contracts purely for the purpose of applying preferential procurement norms. In addition, the Court pointed to administrative clarifications from the Ministry of MSME, which explicitly exclude works contracts involving installation or commissioning from the ambit of the procurement policy for MSEs unless the tenders expressly provide for discrete supply from MSEs.
On the question of Clauses 3 and 11 of the procurement policy, the Court held that these impose institutional obligations on procuring entities to meet overall procurement targets from MSEs—but do not confer individual contractual rights to MSEs in every single tender, especially in composite works contracts. The Court stated that these clauses are intended to guide aggregate procurement behavior and not to be mechanically applied to each integrated contract.
Finally, the Court addressed the issue of locus standi, observing that the petitioners had not actually participated in the tender process. Drawing on legal principles, the High Court held that only entities which have bid or shown discriminatory exclusion in the process can challenge the tender, and that the private firms’ failure to engage in the bid process disqualified them from raising the challenge. The Court rejected their petition, vacated the interim stay on the tenders, and allowed the procurement process to proceed under the applicable project-specific guidelines without applying the MSMED Act’s MSE preference to the SIT contracts in question.
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